The European Union and the United Kingdom have finally agreed on the terms of the trade agreement and succeeded in arranging rules for mutual relations in various areas. However, when it comes to corporate income tax, it is necessary to bear in mind that the United Kingdom is no longer a member state of the EU (and the EEA). What does the United Kingdom’s withdrawal entail for corporate income tax? And what changes should companies prepare for?
The first aspect that comes to mind is the matter of (non-)application of various exemptions related to income paid from the Czech Republic to the United Kingdom. With regard to the fact that as of 1 January 2021 the United Kingdom is no longer part of the EU, the legal conditions for the exemption of dividends, licence fees or sale of shares in a Czech company are no longer met. However, certain advantages are kept due to the existence of the double taxation treaty that was concluded between the United Kingdom and the Czech Republic in the past. According to the relevant provisions of this treaty, the Czech Republic should not have the right to impose a tax on a UK resident’s interest income or income from the sale of shares in Czech companies. However, dividends paid out to the United Kingdom are subject to tax in the Czech Republic (withholding tax) of 5 to 15 percent, depending on the equity investment in the subsidiary.
Nevertheless, in addition to these obvious aspects, there are other situations where companies should be cautious and consider the impact on their business, e.g. when a foreign non-resident taxpayer has income that is subject to tax deductions in the Czech Republic (income from leasing movable property used in the Czech Republic, licence fees, etc.). After the end of the taxable period, the non-resident taxpayer filed a tax return in the Czech Republic and credited withholding tax against calculated tax liability (note: this is a procedure pursuant to Section 36 (8) of the Income Taxes Act). This procedure is no longer allowed for non-residents from the UK, as only non-residents from the EU and EEA are eligible.
Various transactions (mergers, spin-offs, investments) may also be limited; more precisely, the possibilities of transferring tax losses and other tax-relevant items may be limited if any of the participating parties is from the United Kingdom. Intercompany reorganisation (not only) with regard to Brexit must also be properly assessed in terms of possible changes in functions and risks so the intercompany flows remain in line with the arm’s length principle. It is possible that the renegotiation or termination of contracts or activities in connection with Brexit may have significant tax implications that need to be properly assessed.
Czech companies that have business partners from the United Kingdom should be cautious as well, especially if they have a branch or permanent establishment in the Czech Republic. As the United Kingdom has become a “third country”, taxpayers may be subject to the obligation of tax securement for certain types of taxable income with a source in the Czech Republic (note: this obligation does not apply within the EU/EEA).
We also draw attention to the so-called reclassification of non-tax-deductible interest arising from thin capitalisation or a difference in transfer prices to dividends, again in relation to non-residents outside the EU/EEA. In the case of parent companies from the United Kingdom, it is therefore necessary to consider in particular the capital position and the indebtedness of Czech subsidiaries and assess the possible impacts in connection with the calculation of thin capitalisation.